Summary

• African markets would have had a fifth month of gains in August had it not been for the normalisation of the Nigerian naira.  The currency “weakened” 12.7% in the month and this had the biggest effect on the MSCI EFM Africa ex SA index, accounting for more than 90% of the negative returns.  US dollar returns in Kenya (5.7%), Mauritius (4.4%), Morocco (1.8%) and Egypt (1.8%) reduced the effect of the naira’s weakness. 
• The top positive contributor to the index was from Kenya’s Equity Bank which gained 8.4%.  US dollar weakness also contributed to the returns in the month.
• The Fund outperformed in all markets relative to the index, except for Morocco where it has no exposure.  The biggest gains were in Kenya where the largest contributor was Centum Investment (9.4%).  The four largest negative contributors were Nigerian banking shares which declined 16.0% in aggregate in US dollar terms.

Market update - What happened to the “Africa Rising” narrative?

This is the third month that we are discussing the Africa Rising narrative to see if there has been a change.  The optimism for the continent that we saw during the first decade of this century seems to have waned and we weren’t sure that this was justified.  In June we looked at economic growth across the continent and concluded that by excluding the effects of the Arab Spring and oil price collapse from the growth numbers, most of the continent continued on the improved growth path seen earlier this century.  Admittedly some large economies have faced difficulties in the recent past for specific and largely domestic reasons, but the future looks bright with GDP growth north of 5.5% per annum expected through to 2022 by the IMF (excluding South Africa and oil exporting countries).

Based on our visits and interactions with company management in many African countries we observe a continuing improvement in the operating environments to which businesses are exposed.  Last month we analysed the World Bank data from their “Doing Business” project that “provides objective measures of business regulations for local firms in 190 economies”.  This clearly showed that our observations on the ground can be backed up by the World Bank’s detailed analysis.  The business environment has on aggregate continued to improve in line with the trend experienced earlier in the century, so in this sense the “Africa Rising” narrative has also not changed.

Finally, if we look at the investment in infrastructure on the continent, this has not slowed: new railways are being built and commissioned across the continent and road networks are improving. Importantly, as African economies evolve and the services sector grows as a proportion of these economies, a stable and affordable electricity supply is especially key for businesses so that they can be globally competitive.  Many African countries have experienced electricity shortages in the past, but this is changing to a surplus.  Egypt has fast tracked more than 6,000 MW of new electricity generating capacity over the past 18 months and will increase this further, so that by 2020 it will have added 50% to its generating capacity.  Ethiopia has one of the most ambitious plans and wants to increase generating capacity from 2,000 MW to 17,000 MW by 2020, including the Renaissance Dam’s 6,000 MW that is currently being commissioned.  Kenya plans to double and Uganda more than double their electricity generating capacities by 2020.  Many of these new additions are from renewable energy sources and include geothermal, hydro-electric, solar and wind generation.  Many renewable energy options are now considerably cheaper than those using fossil fuels (over the lifetime of the power plant) which will help keep prices low.

Looking forward, we believe that the “Africa Rising” narrative that dominated discussions about the continent early in the century has not disappeared or even stalled, but is continuing despite some large economies having faced difficulties recently.

Fund activity

After the strong run in Kenya, the Fund took some profits towards the end of August.

The Fund has maintained its total exposures to Kenya and Nigeria broadly in line with the index, although the underlying holdings vary considerably. The Fund still has its largest exposure to Egypt, where the Egyptian pound has started strengthening. Morocco remains the Fund’s largest underweight as we view the market as expensive.

Outlook

The ruling by Kenya’s Supreme Court on 1 September that the presidential elections must be re-run has created uncertainty and this has resulted in some equity market volatility. We expect that the currency will be quite stable and that the Central Bank of Kenya is likely to intervene (they have a high level of reserves if need be).  We also expect that Uhuru Kenyatta will win again in October as the margin was high and his Jubilee Party has majorities in both houses.  Although this creates more uncertainty in the near term, we remain positive on the Kenyan economy longer term. The re-run does however delay the recovery we expect in the economy once government gets down to business.  Additional costs for the election and the time to get down to business affects the budget deficit and increases the state’s borrowing requirements and we could see slightly higher interest rates.